Potency tax could be a major buzzkill for sanctioned retailers

Worries abound that there’s a limit to how much above street prices shoppers will pay for legal weed

BY JOHN SCHROYER, GREEN MARKET REPORT

One of the most controversial aspects of New York’s new recreational cannabis market is its tax system, which some have worried will undermine licensed businesses by driving consumers to cheaper underground dealers.

A white paper published in December by a pair of New York tax attorneys, just weeks before the formal start of recreational marijuana sales on Dec. 29, warned of that very possibility. It predicted—and was proven accurate after sales launched—that a legal eighth of cannabis ower in New York with 30% THC would cost about $75.

tition by state authorities, King said.

It’s a big undertaking, as many illicit operators already have brand recognition by o ering legally produced but illegally shipped cannabis from California and Oregon, such as the famed SoCal brand Jungle Boys. at’s one brand name New York City resident Joe Lustberg, managing partner at Upwise Capital, said he ran into recently at a smoke shop.

store on Broadway is going to double that. Housing Works is probably going to do $40 million to $50 million this year.”

Housing Works CEO Charles King declined to share sales numbers to date, but he said he’s absolutely con dent that his nonpro t has a model for success.

“If we really want this path to be pro table, we’ve got to build volume. And that’s the only way we're going to make it successful,” King said, noting that Housing Works is already looking for its second and third locations, the maximum allowed for any adult-use retailer under state law. ■

Prices at Housing Works—the rst state-sanctioned cannabis retailer in the ve boroughs—proved to be not far below that, with prices uctuating because taxes are based on THC potency. According to the nonpro t’s online menu, an eighth of cannabis ower ranges in price and potency from 19% THC for $40 to 27% for $60. With the 13% excise tax added, out-the-door prices would be between $45 and $68, respectively.

But if customers remain price-sensitive, as data from other mature recreational marijuana markets suggest, then they’ll broadly be willing to pay only as much as 10% to 15% above prices on the unregulated market, according to the paper, authored by attorneys Jason Klimek and James Mann.

By contrast, unlicensed street vendors in New York City last month were peddling cannabis eighths for between $10 and $45, Green Market Report found.

Combine that with overall lax enforcement to date against the underground market, and the situation has the potential to undercut state-licensed retailers—particularly smaller and less-capitalized businesses—before they can truly get o the ground, Klimek and Mann asserted.

Charles King, the CEO of Housing Works, said in early January that he doesn’t think the situation is that dire, and companies such as his will be able to survive as long as they stick to a solid retail business plan and tap the immense tourism market.

“I think people know that you’re paying for quality, you’re paying for the taxes and all the rest of what goes with the regulated, licensed market,” King said.

Still, there will have to be more of a focus on enforcement against illicit compe-

“For some cannabis operator who’s competing with the smoke shop next door [that is] able to sell California eighths for $30 [and] that’s better weed than what they’re selling at Housing Works, it’s tough,” Lustberg said. e tax structure also might be altered by the Legislature, because making the system more business-friendly is a top priority of industry interests in Albany, including for the Cannabis Association of New York.

“I do feel con dent that the state is very much aware of the issue with the potency tax and, at the very least, open to reform,” said Brittany Carbone, a board member of CANY and a cannabis farmer upstate. “It’s been well proven that more reasonable tax structures actually result in higher rates of purchase in legal dispensaries, which results in a net positive win for the state, in terms of tax revenues.”

Even if the tax structure doesn’t change, cannabis attorney Lauren Rudick said, the THC-based potency tax will probably encourage the creation and sale of a more diverse range of cannabinoid products that don’t rely only on THC to please consumers. And that could be just what the burgeoning industry needs: more product variety. ■